TARGET PROFESSIONAL TRAINING SCHOOL

ICAG PROFESSIONAL MOCK EXAMINATION

FOR NOV. 2019

LEVEL 2

PAPER 2.2 MANAGEMENT ACCOUNTING

TIME ALLOWED
READING AND PLANNINIG 15 MINS
WORKING TIME 3 HRS

COMPILED BY:
FREDERICK GBLI
TEL: 0507380935
QUESTION ONE

(a) TarGet plc has undertaken market research at a cost of GHS200,000 in

order to forecast the future cash flows of an investment project with an
expected life of four years, as follows:

Year 1 2 3 4
Sales revenue (GHS 000) 1,250 2,570 6,890 4,530
Costs GHS 000) 500 1,000 2,500 1,750

These forecast cash flows are before taking account of general inflation of 4·7%
per year. The capital cost of the investment project, payable at the start of the
first year, will be GHS 2,000,000. The investment project will have zero scrap
value at the end of the fourth year. The level of working capital investment at
the start of each year is expected to be 10% of the sales revenue in that year.

Capital allowances would be available on the capital cost of the investment

project on a 25% reducing balance basis.
TarGet plc pays tax on profits at an annual rate of 30% per year, with tax being
paid one year in arrears. TarGet plc has a nominal (money terms) after-tax cost
of capital of 12% per year.
Required:
i) Calculate the net present value of the investment project in nominal
terms and comment on its financial acceptability. (5 marks)

ii) Calculate the net present value of the investment project in real
terms and comment on its financial acceptability. (3 marks)

iii) Explain ways in which the directors of TarGet plc can incorporate in
the investment appraisal technique and conduct sensitivity analysis
on the cost of investment and cost of capital.

b) Y and Z are two divisions of a large company that operate in similar markets.
The divisions are treated as investment centres and every month they each
prepare an operating statement to be submitted to the parent company.
Operating statements for these two divisions for October are shown below:

Operating statements for October

Y Z
 GHS000 GHS000
Sales revenue 900 555
Less variable costs 345 312
–––– ––––
Contribution 555 243
Less controllable fixed costs (includes
depreciation on divisional assets)
98
42
–––– ––––
Controllable income 460 201
Less apportioned central costs 338 180
–––– ––––
Net income before tax 122 21

Total divisional net assets GHS9.76m GHS1.26m

The company currently has a target return on capital of 12% per annum.
However, the company believes its cost of capital is likely to rise and is
considering increasing the target return on capital. At present the performance
of each division and the divisional management are assessed primarily on the
basis of Return on Investment (ROI).
Required:
i) Calculate the annualised Return on Investment (ROI) for divisions Y
and Z, and discuss the relative performance of the two divisions
using the ROI data and other information given above. (6 marks)
ii) Calculate the annualised Residual Income (RI) for divisions Y and Z,
and explain the implications of this information for the evaluation
of the divisions’ performance.(3 marks)
iii) Briefly discuss the strengths and weaknesses of ROI and RI as methods of assessing
the performance of divisions. Explain two further methods of assessment of divisional
performance that could be used in addition to ROI orRI. (3 marks)

QUESTION TWO
a) Brofre limited retails fertilizer to farmers in Ghana. The company has approached its Bankers
to provide funding for next year’s operations and three months master budget has been requested
for review by the bankers.
You have been approached by the management as a consultant to prepare the 1 st quarter budget
for the banker’s consideration for its next year’s operations.
End of Accounting year December 2014
GHS
Debtors 23,000
Bank balance 55,000
Fixed asset at cost 698,000
Provision for depreciation balance 98,000
Creditors Balance 48,000
Operating expenses for the month December 60,000
Sales for the month of December 2014 400,000
December Ending inventory 20,000
Retained earnings 120,000

The following additional information was also provided to assist your work.
i) Depreciation is provided at the rate of 5% on cost of non-current assets
ii) Closing inventory is expected to increase by GHS 2000 in January from December levels. This
is expected to increase by the same figure in February from the projected figure in January. It is
expected that in March closing inventory is desired to be GHS 26,000
iii) The company makes a profit of 25% on its sales.
iv) Operating expenses is expected to increase by 10% from that of December and this is
projected to increase at the same growth rate to March.
v) Sales is projected to grow by 15% from December until March.

vi) The Debtors figure is desired to be proportional to the sales values.

vii) Creditors value for the three months are expected to be as follows

January - GHS 50,000; February – GHS 46,000 and in March – GHS 52,000
You are required as a consultant for Brofre Company limited to prepare for their Bankers
i) The budgeted income statement for the three months. ( 5 marks)
ii) The budgeted statement of financial Position for the three months. (3marks)
iii) The cash budget for the three months (2 marks)

b) Wargrin designs, develops and sells many PC games. Games have a short
lifecycle lasting around three years only. Performance of the games is
measured by reference to the profits made in each of the expected three years
of popularity. Wargrin accepts a net profit of 35% of turnover as reasonable. A
rate of contribution (sales price less variable cost) of 75% is also considered
acceptable.

Wargrin has a large centralised development department which carries out all
the design work before it passes the completed game to the sales and
distribution department to market and distribute the product.
The selling price of Stealth will be a constant GHS30 per game. Analysis of the
costs show that at a volume of 10,000 units a total cost of GHS130,000 is
expected. However at a volume of 14,000 units a total cost of GHS150,000 is
expected. If volumes exceed 15,000 units the fixed costs will increase by 50%.
Wargrin has developed a brand new game called Stealth and this has the
following budgeted performance figures.
Stealth’s budgeted volumes are as follows:
Year 1 Year 2 Year 3
Sales volume 8,000 units 16,000 units 4,000 units
In addition, marketing costs for Stealth will be GHS60,000 in year one and
GHS40,000 in year two. Design and development costs are all incurred before
the game is launched and has cost GHS300,000 for Stealth. These costs are
written off to the income statement as incurred (i.e. before year 1 above).
Required:
i) Produce the budgeted results for the game ‘Stealth’ and briefly
assess the game’s expected performance, taking into account the
whole lifecycle of the game.
ii) Explain the principles behind lifecycle costing and briefly state why
Wargrin in particular should consider these lifecycle principles.
iii) Explain why incremental budgeting is a common method of
budgeting and outline the main problems with such an approach. (9
marks) (total 20 marks)

QUESTION 4
Cardio Co manufactures three types of fitness equipment: treadmills (T), cross trainers (C) and rowing
machines (R). The budgeted sales prices and volumes for the next year are as follows:

T C R
Selling price $1,600 $1,800 $1,400
Units 420 400 380
The standard cost card for each product is shown below.
T C R
$ $ $
Material 430 500 360
Labour 220 240 190
Variable overheads 110 120 95
Labour costs are 60% fixed and 40% variable. General fixed overheads excluding any fixed
labour costs are expected to be $55,000 for the next year.

Required:
(a) Calculate the weighted average contribution to sales ratio for Cardio Co.
(4 marks)

(b) Calculate the margin of safety in $ revenue for Cardio Co.

(3 marks)

(c) Using the graph paper provided and assuming that the products are sold in a
 CONSTANT MIX, draw a multi-product breakeven chart for Cardio Co. Label fully both
axes, any lines drawn on the graph and the breakeven point.
(6 marks)

(d) Explain what would happen to the breakeven point if the products were sold in order of
the most profitable products first.
Note: You are NOT required to demonstrate this on the graph drawn in part (c).(2 marks)

e) Briefly outline the limitations of breakeven analysis. (2 marks)

a) A company have the following details

Sales revenue(GHS) Total Cost(GHS)
2016 800,000 420,000
2017 600,000 340,000

Required
Calculate:
i) breakeven point and margin of safety, expressed in value
ii) total fixed costs
iii) breakeven point to achieved a desired profit of GHS 400,000. 9 marks

QUESTION 5
The Perseus Co a medium sized company, produces a single product in its one overseas
factory. For control purposes, a standard costing system was recently introduced.

The standards set for the month of May were as follows:

Production and sales 16,000 units
Selling price (per unit) GHS 140
Materials:
Material 007 6 kilos per unit at GHS 12.25 per kilo
Material XL90 3 kilos per unit at GHS 3.20 per kilo
Labour 4.5 hours per unit at GHS 8.40 per hour
Overheads (all fixed) GHS 86,400 per month.
(They are not absorbed into the product costs)

The actual data for the month of May is as follows:

Produced 15,400 units which were sold at GHS 138.25 each
Materials: Used 98,560 kilos of material 007 at a total cost of $1,256,640 and used 42,350
kilos of material XL90 at a total cost of $132,979.

Labour: Paid an actual rate of $8.65 per hour to the labour force. The total amount paid out,
amounted to GHS 612,766.
Overheads (all fixed): GHS 96,840

Required:
(a) Prepare a standard costing profit statement, and a profit statement based on actual
figures for the month of May. (5marks)
(b) Prepare a statement of the variances which reconciles the actual with the standard
profit or loss figure. (Mix and yield variances are not required.) (6 marks)

(c) Explain briefly the possible reasons for inter-relationships between material variances
and labour variances. (2 marks)

(d) State TWO possible causes of an adverse labour rate variance. (2 marks
(total 15marks)

Question 6
Bedco manufactures bed sheets and pillowcases which it supplies to a major hotel chain. It uses a just-in-time
system and holds no inventories.
The standard cost for the cotton which is used to make the bed sheets and pillowcases is $5 per m2.
Each bed sheet uses 2 m2 of cotton and each pillowcase uses 0·5 m2. Production levels for bed
sheets and pillowcases for November were as follows:
Budgeted production Actual production
levels (units) levels (units)
Bed sheets 120,000 120,000
Pillowcases 190,000 180,000
The actual cost of the cotton in November was $5·80 per m 2. 248,000 m2 of cotton was used to
make the bed sheets and 95,000 m2 was used to make the pillowcases.
The world commodity prices for cotton increased by 20% in the month of November. At the
beginning of the month, the hotel chain made an unexpected request for an immediate design
change to the pillowcases. The new design required 10% more cotton than previously. It also
resulted in production delays and therefore a shortfall in production of 10,000 pillowcases in total
that month.
The production manager at Bedco is responsible for all buying and any production issues
which occur, although he is not responsible for the setting of standard costs.

Required:
(a) Calculate the following variances for the month of November, for both bed sheets and pillow
cases, and in total:
(i) Material price planning variance; (3 marks)
(ii) Material price operational variance; (3 marks)
(iii) Material usage planning variance; (3 marks)
(iv) Material usage operational variance.(3 marks)

(b) Assess the performance of the production manager for the month of November. (8 marks)

(20 marks)